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Watchdog: Banks used $2.1B from fund to repay aid

WASHINGTON (AP) -- A government watchdog says that 137 community banks used $2.1 billion from a special fund aimed at boosting lending to small businesses to repay their bailouts from the financial crisis.

A report issued Tuesday by the special inspector general for the Troubled Asset Relief Program says the bailed-out community banks didn't step up their loans to small business nearly as much as other small banks that weren't rescued. Some banks that used the small-business lending fund to repay bailouts didn't increase lending at all, while others increased loans to small business by 25 cents for every $1 from the fund.

Congress created the small-business lending fund in 2010 to encourage banks with less than $10 billion in assets to expand their lending to small businesses. At a time of economic distress, the aim was to help small businesses get capital that had become difficult for them to obtain. The loan program charged the community banks lower interest rates if they used the money for loans to small businesses.

The Treasury Department was authorized to spend up to $30 billion on loans to small banks under the program. Only $4 billion was spent, according to the report by Special Inspector General Christy Romero. Of that, a total $2.7 billion went to the 137 bailed-out banks, which used $2.1 billion of it to repay the higher-interest rescue aid they had received from the government.

For some small banks that received bailouts under the Troubled Asset Relief Program, the small-business lending fund "turned out to be little more than a TARP exit strategy," Romero said in a statement.

The law creating the special fund allowed banks to use money from that program to repay their bailouts. By repaying TARP funds, banks were able to escape limits on executive compensation and other restrictions.

The Treasury Department disputed the report's findings. It said in a letter to Romero that banks that received TARP funds and tapped into the special lending fund "significantly increased" their small business lending. Those banks shouldn't be compared only with banks that didn't receive bailouts and used the fund, Treasury said.

The banks that received TARP funds increased their small business lending by $3.6 billion compared with levels before the special fund was established, Treasury said. That increase is about 40 percent of the total increase in small business lending reported by all banks that tapped into the fund, it added.